Farmers were able to effectively weather the economic crisis of 2008 largely due to strong balance sheets and low farmer debt. A recent report out of the Federal Reserve Bank of Kansas City looked at the current farmer debt landscape and discovered "pockets of stress," especially if interest rates rose or farmer income dropped, explains author Brian Briggeman, economist at the Reserve.
Today 30% of all farm households reported having some debt, with the remaining 70% reporting no debt in 2008. This compares to levels at nearly 60% shortly after the 1980s debt crisis.
Since 2004, real farm debt has risen nearly 5% annually, the fastest increase since the prelude to the 1980s farm debt crisis. However, David Oppendahl, business economist at the Federal Reserve Bank of Chicago, notes that farmers have a lot of liquidity, and "in general agriculture is in a much more stable position today even though we have seen a higher increase in land values over the last year."
The recent rise in debt has been concentrated among large farming operations with more than $1 million in sales, the report notes. These larger operations have more potential income to service their debt. Higher land prices have increased total farm debt held by crop producers, but this sector has also reaped higher farmer incomes over recent years.
Briggeman says livestock producers hold half of the current farmer debt, which is not surprising considering the losses and struggles seen in recent years with lower livestock prices at the same time as higher feed costs occurred. Young farmers (under 35) also have high debt levels with fewer resources to generate farmer income in today's capital intensive agricultural industry.
Currently, farm interest rates are at historical lows, averaging 6.5% across operating and real estate debt and thus limiting farm financial stress. Large farm operators and livestock producers would see minimal impact if rates rose 2%, back to 2007 average levels. Young operators, however, could feel greater financial stress in the event of an interest rate shock. On average, young operators' income was one-third less than the average income of all producers with debt, the report states.
It is not unusual for annual net farm income to plunge 30% as it did in 2002, 2006, and 2009. The report finds applying a one-year, 30% drop in income across today's producers indicates livestock producers and young farmers would be more likely to move into the highest-stressed category.
A combination of sharply higher interest rates and a steep income decline would lead to greater impacts on farm financial stress, the report notes.The last such period occurred in the 1980s, when farm interest rates doubled from 1976 to 1981, reaching a peak of 18% in 1981, and farm incomes declined by 30%.
Under this scenario, the number of financially stressed farms would jump significantly. The percentage of large farming operations facing debt repayment capacity utilization (DRCU) rates greater than 1 would more than double. A DRCU of less than 1 reflects that income is more than sufficient to handle debt—and thus financial stress is low.
The greatest stresses would emerge for livestock producers and young operators —farming operations with the weakest net farm incomes. Under record-high interest rates and sharply falling incomes, the number of livestock producers with DRCUs above 1 would soar from 49 to 67%, and the number of young operators with DRCUs above 1 would rise from 50 to 65%.
Briggeman adds that debt is not a bad thing if used appropriately and managed well. "With booming incomes and booming profits, you can see and justify more debt," he says. However, lenders as well as farmers have not forgotten the lessons learned in the 1980s and remain cautious and smart about adding additional debt.
"A financial shock—an increase in farm interest rates, a decline in farm income, or both—could increase financial stress quickly, especially among livestock producers and young operators. A surge in financial stress among livestock producers, who hold half of all farm debt, would be of particular concern to agricultural lenders," the report concludes.